Best (and Easiest) Savings Strategy: Start Early

Today’s final installment of our four-part series of personal finance quizzes in recognition of National Consumer Protection Week focuses on saving and investment issues.

The Saving and Investing Quiz

1. I need to start saving for retirement by the time I turn age:

A. 35

B. 40

C. 50

D. I don’t need to save at all because I’m sure I’ll inherit enough money to support me all my livelong days.

E. There is no right age, but the earlier I start saving the easier it will be for me to accumulate a substantial nest egg.

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2. It is OK to invest money that’s set aside to address short-term goals into stocks if:

A. I need to make a lot of money on my investments in a short period of time.

B. The goal is not imperative, so I can live with a loss of some principal--even if the loss is substantial.

C. I have lots of credit cards, so I figure I could borrow to pay for my goal, if my investment portfolio didn’t do well enough.

D. The returns on other investments are too low.

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3. I need an emergency fund that equals:

A. Six months’ worth of take-home pay.

B. Three months’ worth of take-home pay.

C. $1,000

D. It depends on the stability of my job, my total obligations and my total resources. If I have a stable job, a reliable car, a working spouse, adequate insurance, some long-term investments and some borrowing power, my emergency fund can be a tiny fraction of my monthly expenses. But, if my work is unstable, my car a disaster, my insurance and long-term savings are nil, I ought to build up a goodly emergency fund or start polling my relatives to see who might be willing to take me in.

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4. My assets should be diversified among several different investment categories--such as stocks, bonds and cash--because:

A. Diversification can help reduce my chance of suffering a devastating loss.

B. I have a variety of different goals--some short-term, some long-term--and different types of investments are ideal for different goals. In other words, cash is an ideal investment for short-term emergency money; while stocks are ideal to address long-term wants, such as retirement.

C. I have a medium-risk profile.

D. All of the above.

E. Both A. and B.

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5. Who would have more money at age 65, assuming they all earn the same average annual return?

A. Mary, who invests $2,000 per year for 10 years--a total of $20,000--starting at age 25.

B. Larry, who invests $2,000 per year for 20 years--$40,000 total--starting at age 35.

C. Kerry, who invests $5,000 per year for 20 years--a total of $100,000--starting at age 45.

D. Harry, who inherits $200,000 at age 55.

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Answers

1. E; 2. B; 3. D; 4. E; 5. A. (Assuming a 10% average annual return, Mary would have $677,265; Larry would have $342,607; Kerry would have $316,404; and Harry would have $541,408.)

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Times staff writer Kathy M. Kristof is a syndicated columnist. Write to her in care of Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail [email protected].